You probably have never considered investing directly in timber, nor considered it as a serious asset class. But this alternative asset class has only seen five negative years in 54!
Andrew Flavell, wealth manager at AlphaWealth, explains, “Forestry investments have seen a substantial amount of inflows recently. There is a new Russian Chinese joint venture that is putting US$200 million into forestry investment opportunities. Likewise, Harvard University – which has the largest endowment of any academic institution in the world – is making a major push into timber and forestry investment. Of its 11% allocation to natural resources, 80% is focused on forestry assets.”
What makes timber and forestry investments so attractive?
Forestry investments are uncorrelated to global equities. Trees do not care whether global stock indices go up or down, and the sources of their returns are quite different.
2. As a “hard asset,” timber investments are an excellent hedge against inflation. With built in off take agreements that contractually escalate at inflation, the asset class is a true family office asset.
3. A real asset that is fully insurable, the returns and risk adjusted returns on timber investing have been impressive. Consider some basic statistics:
· In the UK, the average annualised return for the IPD (Investment Property Databank) UK Forestry index for 10 years is 10.4% in pounds.
· In the United States, the National Council of Real Estate Fiduciaries (NCREIF), timber returns since 1987 through 2010 have averaged 15% a year.
4. There is strong downside protection – the graph below allows you how timber has had only three down years in 47. Extending to today, one would have seen five negative years in 54.
5. An investment in this space achieves the King III Report Triple bottom line: Social – strong partnerships with the local communities through profit sharing and social upliftment, environmental and economic – about 15% IRR ungeared and around 20% geared.
Two main sources of returns in forestry investments
First, is the price of the harvested lumber itself. Whilst prices of the lumber from the trees can fluctuate greatly depending on both economic conditions and the tree species, investors have considerable flexibility on when to harvest their timber, and if for whatever reason the price of lumber in any particular year is low, the investor can simply withhold harvesting and patiently wait until the price moves in their favour.
In addition, the return from the investment comes not only from the price of the cut wood, but from the growth of the trees themselves. In the UK for example, only 4.5% of the forestry investing returns noted above were due to the price of the timber itself, meaning that over 60% of the increase was simply due to the growth of the trees.
How Harvard does it
After suffering a huge drop in its endowment in 2009, Harvard Management Company, the subsidiary that manages Harvard’s $32 billion endowment, has sought ways to diversify its holdings. In recent years, this has meant purchasing and managing dozens of timber plantations in the developing world. Although these plantations have different names, local managers, and business practices, many seem to follow the same model.
On each timber plantation, a large amount of land is acquired, cleared, and planted with a monoculture of fast-growing trees like eucalyptus or pine. These trees are harvested in a rotating cycle and sold to make paper or wood products.
New estimates are that over 10 percent of Harvard’s endowment – over $3 billion – is invested in forests, farms, and other natural resources. Harvard has large timber holdings in New Zealand, Brazil, Romania, Argentina, Chile, Ecuador and Uruguay.
How to access this asset class
In South Africa investors can buy exposure to operational businesses that have timber assets on their balance sheet such as Masonite, York, Mondi and Sappi, or via a private equity structure.